In-House or External Sourcing Advisors: Achieving a Balanced and Sustainable Relationship

I recently responded to a discussion thread on a popular business networking site that raised the question of investing in advisory support and guidance within the outsourcing deal-making and governance process, and whether higher advisory costs translated directly into higher delivered value for the client.

The originating author was seeking to get a discussion going about the value of using advisors within outsourcing deals and comparing larger consultancies with smaller ‘boutique’ advisory companies. Like most people with an opinion, the urge to respond got the better of me - but whilst I responded to the initial query I felt that there was a much bigger question that was not being raised: that there are a number of other key aspects within the dynamics of all outsourcing deals that materially affect the outcome of those deals whether or not you choose to use external advisory support.

Over the years I’ve had the opportunity to either participate in or lead many business process and IT outsourcing deals. I’ve experienced them from the perspective of a technology subcontractor supplying ‘tin’ and other enabling services to a prime; as a ‘deal shaper’ within two market-leading BPO companies orchestrating legal and commercial teams to contract signature in support of a sales process; and as a trusted independent advisor developing and executing sourcing strategies on behalf of my clients to meet their varied business objectives.

Although the perspectives may have been different, the objective was always the same: managing a transparent and fair process; identifying mutual goals; creating a sustainable return (whether that is strategic or financial); and getting to a balanced outcome for both the client and service provider in the optimum time whilst avoiding undue risk.

Getting this process right carries a potentially significant financial cost, heavily influenced by a number of different factors including scope, scale, responsibility, process, pace and good old-fashioned programme management: the "herding cats" bit.

But it’s also about behavior and philosophy: depending on what your own philosophy is and how well you execute your sourcing programmes, costs will vary dramatically and so will the value delivered by either your in-house teams or external advisors.

Getting the basics right up-front should be non-negotiable and although the investment needed to create success is small in comparison with the significant and recurring costs of failure, all too often the process is under-resourced, under-funded or just simply managed badly with the emphasis on procurement rather than business change.

The difference between success and failure can be a very thin line indeed. It may surprise you but I firmly believe that few failures in the outsourcing world are rarely as a result of the supplier failing to deliver the contracted solution. Most probably they fail because of one or more of the following:

• the business objectives and principles that drove the client’s initial need were never really pinned down
• the parties expectations were poorly defined and mismatched
• the economics were fundamentally flawed (i.e. there was no way that the client could get savings at the same time as the supplier made a profit)
• the relationship wasn’t strong enough to handle changing circumstances

These are typical consequences of a traditional arms-length procurement approach to outsourcing that often drives the respective parties to engage in highly competitive, adversarial negotiations, and adopt disruptive or ‘protectionist’ behaviors that try to squeeze the last penny or concession out of the process rather than encouraging collaboration to arrive at the best sustainable business solution for both parties.

So what nuggets of wisdom can I offer? Whether you have the necessary skills and available resource in-house to lead and shape a complex sourcing and change programme, or you choose to work with an external advisor to complement your existing capabilities and bring independence and impartiality to the process, there are some common principles that I believe will help you achieve more effective and sustainable sourcing solutions.
 
Going off on a tangent slightly, choosing an advisor can be a challenge also - but it's important that you get it right. Each company’s approach and philosophy will be different – like most partnering decisions, find the one that matches your culture and objectives, that can demonstrate excellent delivery capabilities and credentials and that has a set of principles that you would like to aspire to.

It’s not just about the company either … it’s also about individuals. Like any recruitment process you need to have the confidence that the individuals being proposed to support and advise you are people that you can work effectively with and that you have confidence in them to deliver. To be effective, advisors need pretty much open access to highly commercially sensitive information and will in many situations be leading the project process and contract negotiations, so trust is paramount. So much advisory work is conducted on the basis of referrals for this very reason.

But I digress … let’s get back to those principles and some thoughts and observations that you may find useful. The first two points are my own personal mantra or soap-box. The third sets out a number of principles that go to the heart of what we do here at Alsbridge.

1. Go for good practice, discipline and common sense … not methodologies

This isn’t rocket science … there’s no magic formula (yes we all have "proprietary methodologies" but when you scrape the glossy top off they are all pretty much the same) … it's just sound advice.

2. Whether you go internal or external, get the approach and behaviors right.

If you don’t use an external advisor, try to build some sense of impartiality or independence into your deal team so that you remain objective, can challenge your approach and can avoid getting entrenched in potentially damaging behaviours.

I’ve also worked with clients who wanted to staff and run all aspects of the programme themselves but recognised the need to continually educate their teams to be better at what they do – using advisors to train expert teams and improve effectiveness.

3. Establish a ‘charter’ or set of principles to cover the triangular relationship between your advisor(s), your prospective service providers and you as the client organisation.

My experience is that words are cheap and that it is behaviors that really drive results; stay objective, set clear expectations, treat all parties within the deal process with respect and integrity and most of all deliver against your promises. Keeping to some simple principles may help make your journey far less painful and the outcome more certain and sustainable:

Make sure that your advisor(s) or in-house team give a commitment to you and respective bidder(s) alike to:

• enable and facilitate a full, collaborative and non-restricted interaction between all parties
• promote a fast, efficient and effective process without excessive tender documentation
• encourage the supplier to co-design the solution
• not waste the supplier's time
• promote interest based, not adversarial, negotiations

Make sure that you select a service provider that:

• does not promise what it will not contract for
• is clear and complete about the service and pricing
• involves delivery staff early and puts the solution before the deal
• ensures deal economics are aligned and sustainable
• recognises the negotiating process needs give and take

Make sure that you:

• dedicate quality time, and take decisions promptly
• are open and honest about the baseline costs and services
• are realistic about future service improvements and how they are created and delivered
• recognise the economics and expect a fair rate for the services; and
• recognise the negotiating process requires flexibility from all parties

Do they work? I can only talk from experience.

I was recently brought in to help structure an offshore outsourcing arrangement for a global leader in the supply of integrated business solutions for retail and wholesale organisations. It was undergoing a major business restructuring designed to reduce cost, improve quality and create stability in both its product portfolio and its research and development teams. As part of that restructuring programme and to help retain a leading position in an increasingly competitive market the CEO decided to explore offshore Product Development Outsourcing (PDO).

Prior to this project, my client had limited and unsuccessful experience of using offshore outsourcing to meet its often-unpredictable customer demand. It had used a traditional ‘project’ approach but had struggled with responsibility splits and governance of a far-shore relationship. The business was therefore a little sceptical of the process and potential outcomes.

It had entered into discussions with a prospective offshore partner but from the outside it was apparent that expectations and understandings were significantly different. The service provider believed that a ‘deal’ had already been struck based upon proposal documents and subsequent ‘sales’ meetings and was expecting a relatively short contract based on their standard model to be concluded in rapid time. The client, on the other hand, whilst keen to work with this particular service provider, was concerned with the commercial package and overall solution and that its potential strategic partner didn’t really understand the true needs and constraints of the business - it was therefore getting prepared for a protracted negotiation. It was also concerned that moving forwards without additional validation of partner and solution may be detrimental to its interests, especially at such a pivotal time in the company’s development.

The potential for a ‘bad deal’ was huge – either from stalled negotiations or from a poorly structured, ill-defined and badly executed contract and relationship – both of which would be costly in the short and long term.

Recognising its own skills gaps and limited experience the client, with the full support of the service provider, asked us to facilitate discussions, gain alignment and arrive at a balanced deal whilst creating competitive tension and ensuring that the process was independent and transparent at all times. Although we worked for the client, our goal was to create a successful and sustainable deal for both parties. That meant working in collaboration and good faith throughout.

The programme was made even more challenging as our client was in the middle of its annual product release cycle, creating conflicting demands on its senior management and R&D staff. It also affected the programme's approach to transition and knowledge-transfer which went through a number of significant changes in order to minimise business disruption.

Following transition my client and its new strategic partner are now in the process of migrating knowledge and capability into a new delivery centre based in Mumbai and have just delivered their first successful project.

The journey was painful at times: both my client and the service provider had to make significant concessions and step back from positions that were sometimes confrontational and potentially deal-threatening. As advisors there were also times when we had to actively support the service provider’s position if we genuinely felt that our client was getting too entrenched or inflexible. It's not about winning … it's about sustainable success and meeting clearly defined and objective business goals … and it's about relationships and trust.

About the Author

John Sheridan is a Managing Consultant with Alsbridge plc. He has over 20 years' programme and commercial management experience and has taken a leadership role in all stages of the sourcing and outsourcing lifecycle covering both the client and service provider perspective. John’s earlier supplier side experience came from Hewlett-Packard Ltd, Andersen Consulting (now Accenture) and PwC where he supported or led a wide variety of commercial arrangements. He subsequently moved into an advisory role and has successfully provided a wide range of client-side outsourcing and shared service advisory, consulting and programme management services. John can be contacted at john.sheridan@alsbridge.eu or on +44(0) 20 7242 0666. With a presence across Europe, North America and Asia Pacific, Alsbridge plc is the award-winning global advisory firm, providing unbiased advice and assistance on outsourcing, shared services and offshoring.